CHAPTER 2: UNDERSTANDING YOUR B2B CUSTOMER’S PROCURE TO PAY PROCESS (P2P)
2.1 Introduction
To achieve excellence in AR, it is important to understand your customer’s purchasing practices and what affects their accounts payable department’s ability to pay you accurately and on time. It is also important to recognize that as more orders are being placed electronically, AR is increasingly becoming the first “face” of our organization to the customer, which further highlights the importance of understanding your customer’s process. The buying process begins with a need for a product or service. The customer’s choice of your company’s product or service depends on your organization’s marketing and/or sales representative persuading the customer of your ability to fill that need and obtain an order. In a perfect world, once the customer receives the product or service, they make payment according to terms. However, the process is typically far from perfect and receiving payment can sometimes be a real challenge. It is valuable to understand what happens when your customer makes a purchase.
Understanding what is happening in your customer’s procure-to-pay (P2P) process can help AR receive full payment-on-time without discrepancies.
Most companies have a very disciplined process when purchasing raw materials, the ingredients used in creating their products (this is referred to as a direct spend). A procurement agent is assigned to work closely with the suppliers to ensure that there is a full understanding in an agreement addressing quality, price, quantity, delivery, and terms. These orders are placed in the ERP system to create a confirming purchase order. A purchase order is extremely important to the order-to-cash (O2C) process, because it is a commitment to pay when the goods and services are received. It also provides the information to the customer’s accounts payable department (AP), so that when AP receives the invoice they have the proper supporting documentation to pay it. However, this is generally not true for the customer’s other types of purchases, known as MRO (material, repairs, and operating expenses), also called indirect spend. These purchases are typically made by a person in the department who needs the goods and services and who deals directly with a supplier without going through a purchasing department. These purchases are usually done on the basis of verbal agreements and an order typically does not have a confirming PO. When AP receives an invoice for these purchases, they have no information or authorization to process these invoices. These are called non-PO invoices, and they take longer to process than PO invoices.
2.2 Non-PO Purchases
Non-PO purchases are usually made by any person in a department who has the need. These orders are placed without the involvement of the purchasing department or accounts payable. Employees purchase what they want, wherever they want. This is called “maverick spend” because it is not controlled, and only the person who ordered the goods knows about the order. In particular, accounts payable knows nothing about it – until an invoice shows up.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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